Dennis' Mortgage Blog

Question of the week:  What is APR and why is that rate higher than the rate on my loan application?

Answer:  I will include link here and down below.  On my website I have posted and explained the Truth In Lending, or TIL, disclosure where APR is disclosed.  Truth In Lending here.

APR is the Annual Percentage Rate and is calculated so as to incorporate the costs of obtaining your loan.  The purpose of the APR is two-fold, one to allow consumers to compare loan programs and offers; and two to allow regulators to determine if a lender is providing high cost loans which have different regulations and policies. 

“Dennis you said our loan is locked at 5.00% but this form says the rate is 5.159%...” this call is normal as the APR calculation is confusing and no matter when or how we explain it, once the Truth In Lending is in hand inevitably the client is wondering what is happening with their interest rate.

The Truth In Lending document and APR is one of the more confusing forms we manage in the industry.  Your application says 5%, we provided monthly payments at 5% and 5% is on the Good Faith Estimate, the application, the Mortgage Loan Disclosure Statement and the Initial Fee Worksheet, but on the Truth In Lending the Annual Percentage Rate is listed at 5.159, of course this leads to confusion.  If the loan is FHA or has mortgage insurance the APR will be even higher, 5.7% perhaps.

Annual Percentage Rate, or APR, is determined by the amount of certain fees and the size of the loan.  For calculating APR fees that are paid for the loan, or fees generally paid because you are getting a loan that you would not pay if you were purchasing the home with cash, are deducted from the loan amount.  Points, origination fees, processing, escrow charges, some title charges, are deducted from the loan amount and then the rate of interest is re-computed using the same monthly payment with the smaller loan balance.  Because the payment is the same and the loan amount is lower the interest rate is higher, thus an APR of 5.159% when the loan is at 5.00%.

If your loan is a true no point no cost loan then your APR and interest rate should be identical.  As mentioned, if you have mortgage insurance your APR will be higher, if you have an ARM you APR will be higher.  Your APR will never be lower than your interest rate.

Generally speaking the higher the spread between your interest rate and APR the higher your loan costs, the lower the spread the lower your loan costs.  Keep in mind that the same fixed costs for a lower loan amount would result in a higher APR than the same fixed costs on a higher loan amount.

APR is confusing, but it serves a purpose of disclosing to you the cost of your mortgage in a way that allows you to compare programs.  It is important however if you are comparing programs that you compare not only the Truth In Lending disclosure but also the Initial Fee Worksheet to ensure the same fees are being included in the APR calculation.  Some fees are counted by some lenders and not by others depending on how their legal department interprets the policy. 

Once again, click here for my detailed explanation of the Truth In Lending  disclosure.

Have a question for me?  Ask me!

Other than flipping another year on the calendar and celebrating our nation’s Independence, it was a pretty quiet week.  Economic data was pretty much limited to initial unemployment claims reporting at 454,000 claims.  While down several thousand from the prior week, having constant initial claims well over 400,000 weekly continues to weigh on economic recovery expectations. 

A few weeks ago there was “surprise” by economists quoted in major media, including financial media such as the Wall Street Journal, at the large drop in existing home sales in the month of May.  Tracking weekly national application data provided by the Mortgage Bankers Association, I predicted the week before the May sales release that home sales were down—pat, pat, pat.  Perhaps the go-to economists for the media have learned their lesson and are also watching weekly applications ahead of June home sales reports due out in two weeks.

While total applications have increased the past several weeks, the increase is solely due to refinance applications, according to MBA data.  For eight of the past nine weeks the volume of purchase applications has declined nationwide.  The total purchase applications for June were 15% below those for May and 30% below April’s totals.  Purchase applications for the last week of June 2010 were almost 35% below the same week in 2009. 

The April deadline for the home buyer tax credit was thought to have pulled a lot of buyers into deciding to buy a home in April instead of May, or June.  As I watch the purchase application numbers continue to shrink however I feel there is something other than no tax credit at work, perhaps no confidence?  As we move into the summer buying season we should see an increase in purchase mortgage applications nationwide, if we do not then the cause can no longer be the tax credit expiration but something deeper.

Speaking of the tax credit…I was amazed that Congress was able to pass a bill through both Chambers without having a billion here and a billion there in spending added to it.  After the June 30^th deadline, but before the Independence Day recess, Congress passed an extension of the deadline for eligible buyers to close their transactions in order to receive the IRS home buyer tax credit.  The deadline has moved from June 30^th to September 30, 2010. 

Financial Reform is stalled in the Senate with the death of West Virginia Senator Robert Byrd.  Not confident that enough votes are in hand to prevent a filibuster of the bill it has been withheld from a floor vote until he is replaced.  West Virginia is currently undergoing a Constitutional review to see if it will have a special election to fill the seat or if the Governor will appoint someone to fill the remainder of Byrd’s term.  As they determine their future representation in the Senate the bill will most likely wait unless some changes can be made to entice a few Republicans to cross the aisle.

I’m in no great rush to see the bill passed.  It has several provisions that are bad for consumers of mortgages and reduces options available to you for both purchase and refinance mortgages.  Most prevalent is the probable elimination of no point and no cost loans---the APR discussion above where your interest rate and APR are the same.  As written now it would no longer be possible for applicants to decide they wish to pay a slightly higher interest rate to avoid points or other costs.

Rates for Friday July 9, 2010:  With the short week trading was fairly light in Mortgage Backed Securities, and the light trading led to some big swings in prices.  A big jump in prices on Tuesday and a subsequent big drop on Wednesday has defined a range within MBS appear to be ready to trade.  Overall from Friday to Friday our rates are flat, the conforming has inched up slightly and the FHA high balance down. 

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional 4.375%                            Up 0.125%

30 year conforming-jumbo 4.50%                     FLAT

30 year FHA    4.25%                                      FLAT

30 year FHA jumbo 4.375%                            Down 0.125%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked.  

Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment with an impound account for taxes and insurance and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

If you are in the vicinity of Bixby Knolls in Long Beach this Saturday come enjoy the Annual Dragster Expo & Car Show, a gearhead’s delight with 20 foot dragsters firing up their engines and classic cars from times gone by.  Saturday on Atlantic Avenue between Roosevelt and San Antonio from 3-9:00 pm. 

Have a great week,

Dennis